Superannuation: Benefits for life

Every Issue

Cite as: April 2012 86 (04) LIJ, p.83

You can protect your loved ones through your super fund.

Death or disablement of the primary bread-winner can have devastating consequences for a family’s financial situation. Your super fund can help you protect your loved ones with cost-effective insurance.

Life insurance products, including income insurance, are the foundation stone of your family’s financial security. If your family’s primary bread-winner dies, who is going to pay the mortgage, the school fees or the ongoing costs of living? In the quest for financial independence and a comfortable retirement, life insurance is an integral part of your saving and wealth-building strategies. If you lose your ability to save and build wealth, insurance is your back-up plan.

Life insurance insures your value as an income earner. Over time, you will increase your earning capacity and make a growing contribution to the financial security of your dependants. For most people, it will be vitally important to secure and protect the financial position of their dependents.

Life and income protection insurance insure against three events that prevent or reduce your ability to generate an income: death, injury and illness.

In most cases, in the event of death or total and permanent disablement, a lump sum may be payable to cover debts and protect family members. In the case of illness or injury, a monthly payment up to 85 per cent of your salary is provided for a certain period (e.g. two years) while you are unable to work.

Unfortunately, whether due to apathy or ignorance, there is complacency in the community about life and income protection insurance, which contributes to alarming underinsurance in Australia. According to Rice Warner Actuaries, while the level of underinsurance has reduced, it is still considerable. Across the Australian adult population, Rice Warner estimates the level of life underinsurance at $3,073 billion, while income protection underinsurance sits at $437 billion.

You can take out life and income protection insurance either inside or outside superannuation.

Setting up insurance outside superannuation may involve the assistance of a broker, potentially lengthy processes including medical tests to assess your risk and the applicable premium. While assistance from a broker may help you better understand your insurance needs, applying for insurance outside super can be more time-consuming and premiums are an immediate out-of-pocket expense.

If you are considering buying insurance outside superannuation, be wary of offers often advertised on television and radio that claim “no medical tests”. While it may on the surface appear an easy option, these products can end up being more expensive as the insurer might classify you as higher-risk and charge a higher premium. A number of exclusions may also apply, and you may already have life insurance through your super fund.

Setting up life insurance and income protection insurance through your super fund will in most cases be a simple and cost-effective way to protect your wealth and income. It can include the following benefits:

Premiums are deducted from your super account rather than your hip pocket.

Many super funds offer automatic acceptance, meaning you are eligible for cover without medical tests.

Super funds offer the benefit of group buying powers, which is likely to result in lower premiums that take into account the averages of the general group or profession, e.g. white collar professionals, resulting in cheaper premiums than those available outside super.

Often, depending on the rules of your super fund, you will receive a tax deduction for the premiums.

Superannuation-funded life insurance and income protection insurance make the most of pre-tax dollars and often are a more affordable and convenient way to access insurance compared to outside super. It’s really worth your while asking your super fund about the benefits of insuring inside super.

ANDREW PROEBSTL is chief executive of legalsuper, Australia’s industry super fund for the legal profession. He can be contacted on ph 9602 0101 or via aproebstl@legalsuper.com.au.